Compound interest: Powerful tool for justice and accountability

It is common for the Court to award pre-judgment interest on judgment sum: see s 51A(2)(a) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) and s 100 of the Civil Procedure Act 2005 (NSW) (the CP Act). However, it is far less common for the Court to award interest on interest, that is, compound interest.

In Chu v Lin, in the matter of Gold Stone Capital Pty Ltd [2024] FCA 766, the Federal Court awarded pre-judgment compound interest pursuant to the general power under s 23 of the FCA Act.

Recently, the Supreme Court of NSW in Firmtech Aluminium Pty Ltd v Xie; Zhang v Xu; Xie v Auschn Conveyancing & Associates Pty Ltd (No 3) [2025] NSWSC 1496 also awarded compound interest.

The plaintiffs in both cases were successfully represented by McCabes Lawyers.

What is compound interest?

Compound interest is calculated on the principal amount, being the damages or debt claimed as well as on all interest that has accrued on that principal amount. It is interest that ‘snowballs’ because it grows exponentially over time. It is in effect interest on interest.

By contrast, simple interest is calculated solely on the principal amount, without regard to any interest that has previously accrued.  This is the type of interest generally awarded on pre-judgment interest orders pursuant to s 51A of the FCA Act or s 100 of the CP Act.

Background to Chu v Lin

In 2014, Ms Chu and Mr Xu (the first and second plaintiffs) invested a combined sum of $7 million into an unregistered managed investment scheme of which Gold Stone Capital Pty Ltd (Gold Stone) was the trustee.  At this time, both Ms Chu and Mr Xu were citizens of the People’s Republic of China seeking to obtain a Significant Investor Visa (SIV) from the Australian Government.  The SIV program required, among other things, that applicants to make investments of at least $5 million in complying investments, including ASIC regulated managed funds with a mandate for investing in Australia.

The Court found that Ms Louise Carol Lin, Mr Hai Zhong Cai, and Mr David Darmali (the first to third defendants) were heavily involved in the management or administration of the relevant fund, although there was substantial dispute as to the nature and extent of that involvement.

Ms Lin and Mr Cai were directors of Gold Stone within the meaning of the Corporations Act 2001 (Cth). Mr Darmali was the sole director to the fourth defendant, Fiducia Asset Management Pty Ltd (Fiducia Asset). Fiducia Asset held an AFSL and an ACL, which engaged Gold Stone as authorised representative to its financial services.

Ms Lin, Mr Cai and Mr Darmali were not only involved in supporting or making unsecured, high‑risk and unreasonably imprudent loans, which ultimately resulted in the loss of the plaintiffs’ invested funds, but were also found to have been involved in the misappropriation of the fund.

The plaintiffs therefore submitted that pre-judgment interest be calculated by way of compound interest, given that Ms Lin, Mr Cai, and Mr Darmali:

1. knowingly and dishonestly procured or induced Gold Stone’s breaches of trust;
2. knowingly assisted in the dishonest and fraudulent design of Gold Stone in committing those breaches of trust; and
3. misappropriated the fund.

Justice Jackman referred to the analysis in Herrod v Johnston [2012] QCA 360 (Herrod). In line with the reasonings of Muir JA in Herrod, the Court found that in circumstance:

1. where the trustee is guilty of fraud, serious misconduct or contumelious disregard of the interests of beneficiaries; and
2. where the trustee has wrongfully made a profit out of the breach,

then compound interest can be awarded.

In Chu v Lin, his Honour held that the principle in Herrod also applies to third parties who have either knowingly procured or induced the breach of trust or fiduciary duty, or have knowingly assisted in a dishonest and fraudulent design by the trustee or fiduciary.

Accordingly, his Honour accepted the plaintiffs’ submissions and awarded pre-judgment compound interest, calculated at yearly rests on the compensation awarded in relation to the breaches of trust and the misappropriation of trust funds.

Why is it important?

This judgment demonstrates that the Court is prepared to make orders for payment of compound interest as it sees fit to ensure the fair administration of justice and, so far as possible, to restore the parties to the position they would have been but for the breach.

Justice Jackman’s decision regarding compound interest is significant in ensuring that the plaintiffs receive compensation that reflects the true time value of money and in doing so, ensure that the defendants do not profit from the misappropriation of funds.

His Honour’s decision is also important as it takes the principle of Herrod further, confirming that where third parties have knowingly procured or induced a breach of trust or fiduciary duty, or have knowingly assisted in a dishonest and fraudulent design by a trustee or fiduciary, an award of pre-judgment compound interest may be made.

In Chu v Lin, compound interest was awarded as the money misappropriated would have accrued interest in its trust fund account at a rate exceeding that which would be reflected by an award of simple pre-judgment interest.

Recently, McCabes also successfully represented a company, Firmtech Aluminium Pty Ltd in a derivative suit in which Justice Nixon of the Supreme Court of New South Wales awarded compound interest in favour of that company in context of an account of profit for wrongful diversion of business opportunity to the defendants: see Firmtech Aluminium Pty Ltd v Xie; Zhang v Xu; Xie v Auschn Conveyancing & Associates Pty Ltd (No 3) [2025] NSWSC 1496.

Contributors:

• Iris Law, Associate
• Michelle Tan, Lawyer